Strong Rise in U.S. Housing Starts

Housing starts came in stronger than expected in May, rising 17.2% to an annualized 532,000 compared to an expected level of 485,000. This increase more than retraced the 12.9% drop in April, although it only partially retraced the 9.2% decline in March. Our forecast assumes that April’s level of starts of 454,000 will likely represent the trough in housing starts activity this cycle.

The increase in overall starts was largely a reflection of the multiples component rising a robust 61.7% to an annualized 131,000 from a very depressed 81,000 in April. However, construction of single units tends to be a better indicator of the underlying trend in new construction and its 7.5% rise in May to an annualized 401,000 represents an encouraging pick-up from an average level of 362,000 for this component in the first four months of this year.

A 4% rise in permits to an annualized 518,000 provides an additional encouraging sign, along with all major regions showing an increase in activity. The gain was led by activity in the West rising 28.6% and strong double-digit increases in the South (16.8%) and Midwest (11.1%) Activity in the Northeast rose a more moderate 2.0%.

So far this year, housing starts have fluctuated between 454,000 and 574,000, which has reinforced the perception that the U.S. housing market has troughed and is poised to start moving higher on a sustained basis. The rise in May of the relatively stable single-detached component provides a very tentative indication that some improvement is occurring. This strengthening is partly attributable to the earlier fall in mortgage rates helping to improve housing affordability.

However, as optimism about the U.S. recovery has grown, there has been greater upward pressure on long-bond yields that has raised mortgage rates in its wake in recent weeks. To stem this deterioration in yields and counter the risk to the recovery in housing, we expect the Fed to continue to maintain very accommodative monetary conditions. To directly address rising yields there remains the possibility that the central bank will expand its program of purchasing government Treasuries via quantitative easing. With price measures coming in generally weaker than expected, this allows the central bank to focus on reviving growth in the near-term.

Producer prices - In a separate report out this morning, producer prices rose a much smaller-than-expected 0.2% in May compared to expectations of a 0.6% rise. Upward pressure had been expected from rising gasoline prices, which were up 13.9% in the month. But this was offset by unexpectedly large declines in food prices (-1.6%) and core prices (-0.1%). Expectations had been for core prices to be up 0.1% in the month.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.